Question: Our payroll person remitted our employee retirement plan “safe harbor” money into the profit sharing accounts of participants. Does it really matter or can we just leave it?
Answer: Believe it or not there could be a difference to your retirement plan participants if the employer money is remitted as safe harbor money instead of profit sharing money. First, there is potentially a vesting schedule difference because safe harbor money is generally going to be 100% vested at all times. Profit Sharing money on the other hand can be subject to a vesting schedule determined by how many years an employee has worked for the company.
Another significant difference between these employer account types is that a participant’s ability to take an in-service distribution may be restricted from one money type or the other. Safe harbor money can’t be withdrawn for a “hardship” purpose, but profit sharing money can be withdrawn if the plan document allows for these types of withdrawals. Safe harbor money is only accessible to a participant who is still working if they are over the age 59 ½ but profit sharing money could be accessible to the participant at a much younger age if the plan document allows for earlier withdrawals. If a deposit was made to the wrong money source the participant may not have access to withdraw funds they would otherwise be able to obtain from the plan.
For these reasons the retirement plan money really should be remitted to the correct account source so if you determine it was improperly classified then you should go through the motions to make the corrections. Contact your investment custodian and find out what they require to reclassify the funds correctly. They have definitely seen this problem before and will be able to tell you how to correct it.